In brief - Future reform of Queensland's infrastructure
planning and funding framework depends on heeding mistakes of the
past

The Newman government's infrastructure planning and funding
framework for development infrastructure has not resolved the
policy issues identified by the Queensland Commission of Audit. A
lack of integration, inequity and economic inefficiency remain. To
assist in rebooting its economic model, Queensland's policy
goal should be to revive its construction and property development
sector.

To plan for the future we need to learn from the past

Queenslanders understand that the planning and funding of
development infrastructure is critical to the design and
construction of the places where we live, work and play.

This is particularly the case in south-east Queensland (SEQ) and
regional cities and towns that are experiencing significant
population growth and increasing demands for development
infrastructure.

However, the current state of policy and practice in Queensland
proves that the German Philosopher, Georg Hegel, was right when he
said: "Peoples and governments have never learned anything
from history or acted on principles deducible from it".

In this article, my premise is that you have to understand the
past to know the present and to plan for the future.

I will provide some broad policy recommendations for the future
reform of the framework for the planning and funding of development
infrastructure in the context of the development of urban and
regional areas of Queensland over the next 20 years.

In doing so, I will discuss how Queensland's economic model
has been broken by those who were not aware of the lessons of the
past and have gambled with the long-term economic future of the
state for short-term economic gain.

Economic model uses mining royalties to fund lower taxes and
charges

Queensland's current economic model was established in the
1970s by the Bjelke-Peterson Coalition government. The model was
based on the simple principle of lower taxes and charges being
funded by mining royalties (See RBS Morgans report Queensland a "two speed economy" by Michael
Knox, 27 March 2012.)

The economic model involved five elements:

Mining royalties were distributed to the regions and cities and
towns as state government grants for development
infrastructure.

Local governments used state government grants together with
rates revenue to build development infrastructure for future
development.

Local governments levied future development with infrastructure
charges to recover the rates revenue expended by local governments
in building development infrastructure but not the state government
grants.

The resulting cheap residential land and lower taxes attracted
population growth resulting in Queensland experiencing an 88%
increase in population over 20 years compared to the 50% Australian
average.

Many of the new Queenslanders brought retirement savings and
set up small businesses which drove growth in urban and regional
areas of Queensland.

At its core, Queensland's economic model involved the use of
state revenue from mining royalties to subsidise urban development
and population growth in Queensland's regions.

The Beattie and Bligh state Labor governments subsequently used
the economic model to fund increased expenditure on education and
health services to address Queensland's lower productivity in
the 1990s and, in the case of the Bligh government, to reflect the
ideological position of the left faction of the Labor party.

This increased expenditure on education and health services (as
opposed to economic infrastructure) was predicated on rising mining
royalties, in particular from coal mining in Queensland's
regions.

Mining royalties reduced by GFC and federal taxes

By 2009, the Queensland economic model was coming under
significant challenge from the global financial crisis (GFC) which
significantly reduced coal prices and exports. In addition, Federal
Labor government taxes, such as the mining and carbon taxes,
created significant uncertainty in mining investment, particularly
in coal in Queensland.

The resulting damage to the Queensland budget, in terms of
reduced revenue from mining royalties, was in the order of $400
million by 2011 and 2012 (see Table 1).

the empowering of local governments to levy infrastructure
charges under priority infrastructure plans from developers to
recover the abolished capital subsidy program of the state
government. In effect, the state government's subsidy of up to
50% for development infrastructure was passed on to
developers.

the resulting significant increases in infrastructure charges,
when combined with suppressed housing demand and reduced financing
in the context of the GFC, adversely impacted on development
feasibility and housing affordability. This resulted in the
introduction of capped infrastructure charges and capped water
charges for SEQ water businesses.

Queensland's economic model broken

The Bligh government's policy responses had the effect of
breaking the Queensland economic model in five respects.

State government per capita investment in development
infrastructure dropped significantly below that of other Australian
states (see Table 2).

The capping of infrastructure charges created a funding gap,
particularly for high-growth local governments, which is estimated
by the Local Government Association of Queensland (LGAQ) to be some
$480 million annually. This has caused local governments to:

reduce the construction of development infrastructure to
support property development.

Capped charges were utilised unwisely by some local
governments, particularly in rural and regional areas, to increase
their infrastructure charges beyond the short-term marginal cost of
the provision of that infrastructure. In effect, capped charges
functioned as a tax on development.

The political fallout of privatisation brought down the Bligh
government in March 2012, while the combination of local taxation
increases and reduced economic activity in the construction and
property development sector brought down 44 mayors in the April
2012 elections – the largest turnover in local political
leaders since World War II. (See Submission – Discussion paper: Infrastructure planning
and charging framework review, page 2.)

Newman government confronted by significant challenges

The Newman LNP government, which replaced the Bligh government
at the March 2012 election, confronted five significant
challenges:

Queensland did not have an integrated state and local
government infrastructure planning model.

Queensland did not have an infrastructure funding model which
was financially sustainable for local governments or financially
feasible for property developers.

The residential property industry was stagnant as a result of
poor public policy.

The Queensland economic model was broken.

Queensland's fiscal position was unsustainable and urgent
budget consolidation was required.

Queensland Commission of Audit recommends fiscal consolidation,
reducing the role of government and long-term financial
planning

The Newman government's Queensland Commission of Audit (QCA)
made three fundamental recommendations (See Queensland Commission
of Audit's 2013 Final Report):

Reducing the role of government – to be achieved by
privatising government assets and providing for greater private
sector delivery of public services.

Long-term financial planning – to be achieved by improved
budget, cash and asset management practices underpinned by an
InterGenerational Report for the state with a 40-year perspective
and 10-year State Infrastructure Plan.

The QCA also noted, in the context of its recommendation for a
10-year State Infrastructure Plan, that while there have been
previous attempts at longer-term strategic plans and infrastructure
plans, their usefulness has been significantly diminished by the
lack of any serious assessment of available financial capacity (See
Queensland Commission of Audit's 2013 Final Report, pp. 1-17).

Therefore, it was critical that the Newman government's
ultimate policy response on the funding of development
infrastructure did not result in the infrastructure planning
framework being divorced from the cost of the development
infrastructure and the available financial capacity of local
governments to fund that infrastructure.

Newman government considers four infrastructure charges

The Newman government considered four broad options on the
funding of development infrastructure:

Planned charges – Infrastructure charges
which reflect the planned cost of the trunk infrastructure to be
provided by local government.

Maximum capped charges – Infrastructure
charges which remain capped in accordance with the policy position
of the former Bligh government.

The LGAQ also noted that the funding of this gap would either
increase local government borrowings and as a result state
government borrowings, which would make it more difficult to regain
the state's AAA credit rating, or it would increase local
government rates by between $571 to $768 per rateable property (see
Table 3) (Submission – Discussion paper: Infrastructure planning
and charging framework review, page 10).

Introduction of framework for local government offsets and
refunds

The Newman government implemented its policy position in
relation to the review of Queensland's infrastructure planning
and funding system on 4 July 2014 through amendments to the Sustainable Planning Act 2009.

Its policy response was to retain the Bligh government's
infrastructure planning and funding frameworks for development
infrastructure and to introduce a framework for local government
offsets and refunds for the provision of trunk infrastructure by
developers:

Infrastructure planning framework – The
infrastructure planning framework of the Bligh government involving
a priority infrastructure plan which identifies a priority
infrastructure area, planning assumptions and plans for trunk
infrastructure was retained; albeit the priority infrastructure
plan has been renamed as a local government infrastructure
plan.

Infrastructure funding framework – The
maximum capped charges framework of the Bligh government was also
retained.

Offsets and refunds framework – A
framework was introduced in relation to the provision of
development infrastructure by developers under which developers can
offset the cost of land and work contributions for trunk
infrastructure against infrastructure charges and seek a refund
from a local government where the value of the offsets exceeds the
infrastructure charges.

Policy position improved but enduring policy issues remain

While the Newman government's introduction of an offset and
refunds framework represents a net improvement on the Bligh
government's policy position, its adoption of the Bligh
government's policy position for infrastructure planning and
funding gives rise to continuing issues in terms of a lack of
integration, inequity and economic inefficiency.

Framework fails to integrate infrastructure and land use
planning with infrastructure funding

The basic policy objective of any infrastructure planning and
funding framework must be to integrate land use, infrastructure and
funding such that infrastructure is funded in a manner that enables
it to be constructed prior to, or current with, development. This
will ensure that existing infrastructure networks are not
overwhelmed by new demand.

The primary goal of an infrastructure charge is to recover costs
for the provision of infrastructure by a local government. The
infrastructure funding framework does not achieve this.

However, neither the Bligh nor Newman governments have released
a cost-benefit analysis to establish that the benefits arising from
certainty exceed the $480 million annual costs for foregone
infrastructure charges, as well as the unquantified costs of social
inequity and economic inefficiency associated with the
infrastructure funding framework.

Therefore, the infrastructure funding framework does not
integrate infrastructure and land use planning with infrastructure
funding.

Framework fails to encourage equity horizontally and
vertically

The government's policy response does not expressly or
impliedly encourage the provision of infrastructure and serviced
land in a manner which achieves or encourages equity.

In particular, the infrastructure funding framework does not
encourage:

Horizontal equity – Those persons that
benefit from development infrastructure should be the persons that
pay for the infrastructure (benefits principle). This clearly is
not the case, given that capped infrastructure charges are
calculated by means of an average cost approach rather than a
marginal cost approach.

Vertical equity – Those persons that
have the greater ability to pay should contribute more towards the
cost of providing development infrastructure than do those who have
a lesser ability to pay (liability-to-pay principle).

Framework encourages inequity between developers and
landowners

In particular, the infrastructure funding framework
encourages:

Inequity between developers – The
developers of low-cost development fronts (generally infill
development undertaken by smaller entrepreneurial developers) will
subsidise higher-cost development fronts (generally greenfield or
brownfield development undertaken by larger institutional
developers).

Inequity between landowners – The
landowners of lower-cost development fronts (generally in infill
locations) will subsidise the landowners of higher-cost development
fronts (generally in greenfield or brownfield locations).

The infrastructure funding framework, encouraging as it does
horizontal and vertical inequities, is likely to give rise to
further issues of political unacceptability from landowners,
smaller entrepreneurial developers and local governments.

Framework encourages urban and regional settlement patterns
which are not economically efficient

The infrastructure funding framework, to the extent that it does
not provide for full cost recovery, does not encourage the
provision of development infrastructure and serviced land which is
economically efficient.

In particular, it does not encourage:

Productive efficiency – The total
average cost for development infrastructure and serviced land
should be minimised by developing land where the total
environmental, social and financial cost of providing additional
development infrastructure and serviced land is the lowest. In
general terms, this is likely to be in locations near serviced
land.

Allocative efficiency – The price for
development infrastructure and serviced land should accordingly
reflect the costs incurred in its provision and should not be
distorted by taxes, subsidies or other measures. Therefore, the
price for development infrastructure should reflect its marginal
cost; that is the cost of increasing the capacity of development
infrastructure to produce one more unit of service to satisfy
demand, rather than its average cost.

Dynamic efficiency – The development
infrastructure and serviced land to be provided in the short term
should also impose the least cost over the long term, while
providing the maximum amount of choice for development.

The infrastructure funding framework encourages urban and
regional settlement patterns which are not economically efficient.
They are likely to result in dead weight losses that will impose
long-term financial costs on state and local governments, smaller
entrepreneurial developers and some landowners.

Policy goal should be to reboot the Queensland economic model
through revived construction and property development sector

While Queensland's recent political history teaches us that
good policy is good politics and that bad policy is disasterous to
politicians, mistakes of the past continue to be repeated.

I believe our policy goal should be the rebooting of the
Queensland economic model through a revived construction and
property development sector. Four policies could be implemented to
assist with the achievement of that goal:

Adopt an integrated infrastructure planning model – As
recommended by the QCA, a 10-year State Infrastructure Plan linked
to the financial capacity of the state to fund state infrastructure
should be complemented by a 10-year Local Infrastructure Plan which
is also linked to the financial capacity of local governments to
fund development infrastructure.

Adopt an integrated infrastructure funding model which is based
on these principles:

Development outside of the priority infrastructure area or in
the priority infrastructure area but inconsistent with the planning
assumptions of a local government infrastructure plan, should be
subject to conditions of a development approval requiring
development charges, i.e. financial contributions for a local
government's additional trunk infrastructure costs.

Infrastructure charges should be linked to the funding of
essential development infrastructure - water supply, sewerage,
transport and local parks - with community benefit infrastructure
such as district and regional sport, recreational and community
facilities being funded through local government rates.

Infrastructure charges should be calculated on the short-run
marginal cost that is the incremental cost of the provision of
additional development infrastructure to fund future development
(See Productivity Commission of Australia's
Public Infrastructure report, page 143).

Infrastructure charges can be capped by the state government to
achieve state economic objectives, e.g. the promotion of the
construction and property development sector, or state social
objectives, e.g. housing affordability.

State government subsidies through capped infrastructure
charges should be funded by the state government through
compensatory grants to local governments or, as in the case of New
South Wales, through a Priority Infrastructure Fund which is used
to fund local development infrastructure. (See Productivity
Commission of Australia's
Public Infrastructure report, page 170.)

Adopt local government budgets which are based on:

A conservative capital works program which is limited to only
essential trunk development infrastructure and the provision of
trunk development infrastructure at a lower standard of
service.

Increased revenue from rates and charges involving:

A review of the differential general rating system to remove
cross subsidies.

Separate rates and charges to fund community benefit
infrastructure such as the environment, parkland, open space,
community facilities, pedestrian and bikeways, and other local
government facilities such as emergency services.

Adopt policies to fund trunk infrastructure through property
development projects – A local government could review its
land holdings to identify land in proximity to proposed development
infrastructure which could be developed by the local government or
a third party on behalf of the local government to fund the
development infrastructure.

Future reform of the framework is inevitable but we must heed
the lessons of the past

The Newman government's infrastructure planning and funding
framework for development infrastructure, while an improvement on
that of the Bligh government, has not resolved the policy issues
identified by the QCA. The effect is that enduring policy issues of
a lack of integration, inequity and economic inefficiency
remain.

As the Prime Minister Tony Abbott recently said during his
address to the World Economic Forum in Davos, Switzerland,
"You can't spend what you haven't got. No country has
ever taxed or subsidised its way to prosperity. You don't
address debt and deficit with yet more debt and deficit".

It is very unlikely that we have heard the end of infrastructure
planning and funding reform in Queensland. Future reform of the
infrastructure planning and funding framework for development
infrastructure is inevitable.

If we are to reboot Queensland's economic model, future
reform of the framework for the planning and funding of development
infrastructure should heed the warning of Georg Hegel, so that we
are not destined to repeat the mistakes of the past.

The article discusses the legislative requirements and then provides some comments on common mistakes made by caveators.

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